This is an adaptation of a summary and analysis of the recent decision in Gucci America, Inc. v. Frontline Processing Corp., 2010 WL 2541367 (S.D.N.Y.), discussed here casually earlier. Jane Coleman’s definitive online treatise Secondary Trademark Infringement has recently been updated and the impact of this decision integrated into the text; a full update is planned for September. The complete analysis of Gucci, including full citations, can be found here.

The essential role played by credit card companies in online trademark infringement was recognized in Gucci America, Inc. v. Frontline Processing Corp. In that case, the court allowed contributory infringement claims to go forward against companies that had established credit card processing for an online counterfeit merchant. The payment for the counterfeit goods sold on its website was part of the infringing process, the court reasoned, drawing on Judge Kozinski’s dissent in Perfect 10, Inc. v. Visa Intern. Serv. Ass’n, and most of the infringing sales – of which the companies allegedly knew or should have known – were consummated using credit cards.

Gucci v. Frontline arose out of successful trademark infringement litigation brought by Gucci, the well-known manufacturer of luxury goods, against an online merchant operator of a website called “TheBagAddiction.com,” in which the owners admitted to liability for selling counterfeit Gucci products. Thereafter, Gucci turned to the three companies that had helped the merchant obtain credit card services, alleging both vicarious and contributory liability for trademark infringement. One of the three defendants, Durango Merchant Services acted as a middleman, while the other two, Frontline Processing Corporation and Woodforest National Bank, provided credit card processing services to the merchant.

In rejecting the defendants’ motion to dismiss, the court allowed the contributory liability claims to go forward as to all three defendants, but on different legal theories in accordance with their roles. As to Frontline and Woodforest, the court found the pleadings sufficient to allege contributory trademark infringement, based on their knowledge and control over the infringing activity on the website. As to the middleman, Durango, the court found the pleadings sufficient to allege contributory infringement based on an inducement theory.

As to Frontline and Woodforest, the court also found the pleadings stated a claim for contributory trademark infringement, based on the defendants’ knowledge and control over the infringing activity on the website. Citing eBay and Perfect 10, the Gucci court reiterated the direct control and monitoring test, stating that

[e]ven if a defendant does not seek out and intentionally induce a third-party to commit trademark infringement, it may still be held liable for the infringement if it supplied services with knowledge or by willfully shutting its eyes to the infringing conduct, while it had sufficient control over the instrumentality used to infringe.

Moreover, an allegation of the defendants’ general knowledge that infringement is taking place is not sufficient. “[A] service provider must have more than a general knowledge or reason to know that its service is being used to sell counterfeit goods,” the court emphasized, citing further language in Tiffany that “’Some contemporary knowledge of which particular listings are infringing or will infringe in the future is necessary.'”

Both credit card processing companies either knew or should have known that they were servicing an infringing site, under the facts alleged, the court concluded. In both cases, a Durango agent had a dual role as both an employee of his company and a sales representative for the two credit card companies, and the court consequently accepted the allegations charging the companies with his knowledge. Thus, regarding Frontline, Gucci alleged that that company was aware of customers’ written acknowledgement of purchasing “replicas” as directed by the Durango agent. As to Woodforest, the court noted that its application for credit card services indicated a Chinese manufacturer, rather than Gucci, for the website’s designer handbags. Moreover, both companies allegedly performed a level of review of the infringing website that should have alerted them to its obvious sale of counterfeit Gucci products. Finally, both companies were involved in reviewing consumer complaints and “chargebacks” which would have alerted them to the sale of counterfeit Gucci items on the website.

As to the element of control, “the only relevant inquiry is the “extent of control … over the third party’s means of infringement,” the court reiterated, citing Tiffany v. eBay and Lockheed Martin. In this case, the infringing website was, allegedly, “functionally dependent” on the credit card servicing companies, and this dependence was sufficient control to allow the contributory liability claims to proceed against it.

Specifically, the “credit card processing services [were] a necessary element for the transaction of counterfeit goods online, and were essential to sales from TheBagAddiction.com,” Gucci alleged. Moreover, both companies earned “significant revenue” from each sale. Quoting directly Judge Kozinski’s dissent in Perfect 10, the court explained, “’They knowingly provide a financial bridge between buyers and sellers of [counterfeit products], enabling them to consummate infringing transactions, while making a profit on every sale.”

The court did not require Gucci to allege “the ability to literally shut down the [infringing] website,” as the defendants would have had it. Likening the two companies to “the flea market purveyor who refuses to provide a booth to a counterfeiter,” the court noted that both companies could have “simply refused to do business” with infringing internet merchants.

The Gucci court distinguished its relatively clear-cut facts from those in Perfect 10 which involved both copyright and trademark infringement claims arising out the distribution of infringing images available on the actual website. It reasoned that in Perfect 10, the plaintiff “failed or perhaps was unable to allege that the credit card service providers had the power to remove the infringing material” or “directly stop their distribution” because the infringement occurred on the website itself and a credit card transaction was not needed for the website to continue to infringe.” In Gucci, by contrast, the infringement occurred through the sale of the counterfeit Gucci products, and payment for those products, the court reasoned, again relying on Judge Kozinski’s dissent, is “part of the infringement process.”

The hand-in-hand relationship between the infringing website and the defendants, without whose credit card processing services sales could not be transacted, was ultimately what mattered to the court in Gucci. The defendants allegedly supplied an “essential factor,” the court reasoned, similar to the common carrier that delivered unbranded gasoline to a station “it knew would resell the gas under the Getty brand name,” as in Getty Petroleum Corp. v. Aris Getty, Inc. The website was thus allegedly “functionally dependent” on the defendants, and this dependence was sufficient to demonstrate the control needed for contributory liability.

As to the middleman, Durango, the court found the pleadings sufficient to allege contributory infringement based on an inducement theory. In doing so, the Gucci v. Frontline court relied on the Ninth Circuit’s language when that court analyzed the contributory copyright infringement claims in Perfect 10, derived from the Supreme Court decision in Grokster. Namely, the court inquired into whether Gucci had alleged that Durango “communicated an inducing message to [its] …users[.]” It looked further into whether Durango had allegedly created “advertisement[s] or solicitation[s] that broadcast[] a message designed to stimulate others to commit violations.” Finally, the court considered whether Gucci’s allegations suggested Durango had taken “affirmative steps to foster infringement,” and “promoted their payment system as a means to infringe.”

Durango’s internet marketing profile as well as its activities on behalf of the direct infringer prompted the court to find Gucci’s allegations of inducement sufficient. It likened Durango to companies that offer loans to customers with bad credit, noting that its “website reache[d] out to “high risk merchant accounts,” including those who sell “replica products.” More specifically, Gucci had pointed to discussions in which one of Durango’s representatives acknowledged the merchant was having trouble obtaining credit card services because it sold “replicas,” a euphemism for counterfeits. Citing the Ninth Circuit, the Gucci court concluded that Durango “communicated an inducing message to [its] users,” and that “Gucci [had] pled sufficient facts to infer that Durango crafted “advertisement[s] or solicitation[s] that broadcast[] a message designed to stimulate others to commit violations.” Finally, the court found that Durango had helped the online merchant set up a system to avoid “chargebacks” by requiring customers to acknowledge in writing that they were purchasing “replicas.” This practice, the court concluded, indicated “affirmative steps taken to foster infringement” or “that Defendants promoted their payment system as a means to infringe.”

Note that by contrast, the two other defendant companies in Gucci were not subject to a claim of inducement. The court found that “Though both companies allegedly advertised for high risk merchants, they did not bring [the direct infringer] to the table the way Durango allegedly did.” The fact that they charged higher fees for processing high risk merchants and that Frontline was aware of customers’ written acknowledgement of purchasing “replicas” did not constitute “affirmative steps necessary to foster infringement.”

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The question of whether consumers are likely to be confused is the signal inquiry that determines if a trademark infringement claim is valid. This blog is about trademark law, copyright law, free speech (mostly as it relates to the Internet) and legal issues related to blogging.

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